MNI BRIEF: Balance Sheets May Weaken Tightening-ECB's Schnabel

The European Central Bank’s large balance sheet “may have weakened the transmission of monetary policy during the recent tightening cycle,” executive board member Isabel Schnabel said in a speech about the benefits and costs of asset purchases on Tuesday.

A slow and gradual approach to quantitative tightening “is probably one reason why QT announcements are often found to have smaller effects on bond prices than QE”, she said in Japan, adding that, despite ECB staff estimates that the effect of QT on term premia is not different to that of QE, risk premia remained compressed in many market segments, making financial conditions more accommodative.

Asset purchases are more effective in moments of financial stress but the experience of the past two years likely has weakened its role “as a commitment device”. However, the ECB’s new Transmission Protection Instrument helped it to show determination to ensure smooth transmission, and without it “the historically steep hiking cycle may not have been feasible.”